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As OTC instruments, interest rate swaps (IRSs) can be customised in a number of ways and can be structured to meet the specific needs of the counterparties. For example: payment dates could be irregular, the notional of the swap could be amortized over time, reset dates (or fixing dates) of the floating rate could be irregular, mandatory break clauses may be inserted into the contract, etc.
In recent years, interest rate swaps have become an important component of the fixed-income market. With an interest rate swap, investors will typically exchange or swap a fixed-interest payment ...
The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2012 [3] were US$494 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps.
An amortizing swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap, perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. It is suitable to those customers of banks who want to manage the interest rate risk ...
A zero coupon swap (ZCS) [1] is a derivative contract made between two parties with terms defining two 'legs' upon which each party either makes or receives payments. One leg is the traditional fixed leg, whose cashflows are determined at the outset, usually defined by an agreed fixed rate of interest.
Resets are most commonly used in Interest rate swaps, to determine the value of the floating rate payment for each period. The parties will have agreed a source for the reference rate (usually a named screen on an information vendors system, though any public domain source will do, such as a newspaper or government publication).
By exploiting this odd shape through receiving the high rates around 'hump' and paying the low rates within the trough, The FI-RV Investor hopes to profit by waiting until the yield curve normalizes. An example of this type of distortion occurred in late 1994 and early 1995 when Alan Greenspan raised the US Fed Funds rate from 3.00% in May 1994 ...
For interest rate swaps, the Swap rate is the fixed rate that the swap "receiver" demands in exchange for the uncertainty of having to pay a short-term (floating) rate, e.g. 3 months LIBOR over time. (At any given time, the market's forecast of what LIBOR will be in the future is reflected in the forward LIBOR curve.)